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ARGENTINA: Rolling Back Privatisation of Pensions

Marcela Valente

BUENOS AIRES, Mar 1 2007 (IPS) - The Argentine Congress approved reforms of the pension system that will strengthen the role of the state, after the partial privatisation of the system that was carried out in the 1990s. Chile is also planning similar reforms.

But although the bill received near-unanimous support, some of its backers complain that it does not go far enough.

The lower house of Congress voted 209-10 in favour of the bill late Tuesday, 15 days after it made it through the Senate. The only party that did not back the reforms was the small right-wing Propuesta Republicana

The centre-left administration of Néstor Kirchner had submitted to the legislature reforms aimed at partially rolling back the changes adopted over a decade ago, when the pay-as-you-go social security system was opened up to private participation, and individual pension accounts were created, following the Chilean model.

But leftist parliamentary Deputy Claudio Lozano, of the Emancipación y Justicia bloc of legislators, told IPS that “The reforms are a step forward, but the transformation will be very limited if it doesn’t go any farther.”

“It runs the risk of serving the interests of the private pension fund administrators, which would hold onto the biggest contributors, and could lead to the definancing of the public pension system,” said the lawmaker, who nonetheless voted for the bill.

Modifying the pension system was one of the government’s pending tasks, as it considered the privatisation of the system a failure, and saw the coexistence of the traditional pay-as-you-go public pension scheme and the private pension funds created in 1994 as imbalanced.

Since Kirchner took office in May 2003, the minimum pension has increased significantly, and early retirement has been offered to those who become unemployed before reaching the age of retirement. In addition, homemakers are now eligible for pensions, and moratoriums on contributions were extended to homemakers and workers who did not pay into the pension system in the past.

With the changes that had been adopted so far, 80 percent of the elderly in Argentina are now covered by the social security system.

There are nearly 14 million retirees in this country of 37 million, 12 million of whom form part of the individual pension accounts system put in place by the government of Carlos Menem (1989-1999).

But half of those who are saving up towards their retirement in the private system did not choose their pension fund, but were automatically assigned to one after failing to make their choice before the deadline expired.

The bill passed by Congress on Tuesday eliminates the prohibition for workers to transfer from the individual accounts to the public system – a rule that benefited the private pension funds (known by their acronym, AFJPs), which are companies that administer and invest workers’ contributions.

The bill also sets a ceiling on the commissions that the AFJPs can charge their clients.

Another key modification is that automatic registration in the pension system will no longer favour the AFJPs.

Under the previous law, people starting out on their first job had three months to choose between the public pay-as-you-go system or the individual accounts. Once the deadline was up, if the employees had not made their choice, they were automatically assigned to one of the AFJPs.

But now, employees who fail to choose one of the AFJPs will be registered with the public social security system.

Nevertheless, a group of lawmakers led by Lozano argued that if the current modifications are final, they will not only fall short, but will actually hurt the public pension system.

Starting in the mid-20th century, Argentina had a strong social security system based on contributions from employers and employees and on the principle of solidarity, which guaranteed retirees a decent pension.

But a series of economic crises brought the system to the verge of collapse.

In 1994, as part of free-market and structural adjustment policies implemented by the Menem administration, the pension system was partially privatised.

The new system, inspired by the one adopted in 1981 by then dictator Augusto Pinochet (1973-1990) in neighbouring Chile, coexisted alongside the public pension regime, but offered the private funds a number of advantages. For example, affiliates who opted for one of the AFJPs could not return to the public social security system.

But as soon as the new law goes into effect, people who are now paying into one of the AFJPs will have 180 working days to decide whether or not they want to transfer to the public pension scheme. And in five years, that choice will be made available again.

Lozano, however, objected in Congress that “This supposed freedom to choose is not true freedom, because affiliates have only 180 days to return to the pay-as-you-go regime, but if they want to switch from the public to the private system, they can do so at any time.”

Social security reforms have become news again in Latin America.

Last year, ECLAC Secretary-General José Luis Machinea acknowledged that the reforms and privatisation implemented in the 1980s and 1990s had failed in terms of drawing more workers into the formal pension system and expanding social security coverage, partly because they were based too heavily on “incentives” at the expense of the principle of solidarity.

As a result, only four of every 10 workers in Latin America pay into some kind of pension system and just four out of 10 people over 70 draw a pension in the region, according to ECLAC (Economic Commission for Latin America and the Caribbean).

The return to a social security system with a stronger role for the state is also being studied in Chile on the initiative of socialist President Michelle Bachelet, who plans to submit a bill to Congress this year.

Chile was a pioneer in the region in privatising its social security system, although it left the public scheme in place for a minority of affiliates. The changes now being studied there, like the ones approved in Argentina, are focused on creating a more balanced system, but without fundamentally modifying how the private pension funds operate.

There is a risk that employees in stable jobs who draw large salaries will choose to remain in the AFJPs, which would offer them the chance to save more towards their retirement, and that only the lowest-earning workers would switch to the public system, said Lozano.

The latter will have a minimum pension guaranteed by the state, which would have to do its best to stretch out the contributions received, in order to keep the social security system from going bankrupt, he said.

Amendments to the bill proposed by Lozano and Deputy María América González, of the Alternative for a Republic of Equals (ARI) party, did not prosper.

Their proposal was to make the current reforms part of a transition period, and to set up a commission of government officials, legislators and delegates of social organisations, with the aim of designing a single, unified public pension system based on two premises: basic universal social security coverage financed by general revenues, and intergenerational solidarity.